Darling's banks reform criticised

Chancellor Alistair Darling has pledged a crackdown on "irresponsible" bank pay - but his financial reform plans came under fire for not going far enough.

Mr Darling said banks would face penalties if they failed to curb pay deals which encouraged excessive risk-taking.

But while the Financial Services Authority (FSA) will have greater powers and banks face higher capital requirements, the current oversight regime will be left largely intact, and there will be no new powers for the Bank of England, despite increasingly vocal calls from the Governor Mervyn King.

The standing committee of the Tripartite Authority - consisting of the FSA, Treasury and the Bank of England - will be replaced by a more formalised Council for Financial Stability. The Tripartite was criticised for failing to provide effective leadership in the crisis.

But opposition leaders said the Government's proposals should have gone further. Liberal Democrat Treasury spokesman Vince Cable said it was "not so much a White Paper as a blank paper". And shadow chancellor George Osborne - who has pledged to scrap the Tripartite and give more powers to the Bank of England - said the plans "ducked every difficult question" on reform, and amounted to "a complete surrender of the Government's responsibility to fix the system of regulating the City it created and which so spectacularly failed".

The proposals largely adopt the recommendations of the Turner Review on banking regulation published by FSA chairman Lord Turner in March.

Mr Darling said the City watchdog will report annually on whether pay practices are likely to lead to a build-up of systemic risk - and make recommendations for action if this is thought to be the case.

The Chancellor added that banks and financial institutions need to be "better managed". "We need a change of culture in the banks and their boardrooms, with pay practices that are focused on long-term stability and not short-term profit," he said.

Banks should hold higher capital buffers, and will be be forced to build up bigger cushions in good times to compensate in downturns, the Chancellor said. Mr Darling also supports a "backstop" rule to ensure minimum capital levels are maintained and stop banks from lending too much.

Although there are no new powers for the Bank of England, the FSA will be given increased responsibilities to intervene with banks on a case-by-case basis. It will also share formal statutory responsibility for financial stability with the Bank of England, giving it "unambiguous authority" to tackle systemic risks.